Financial History Issue 132 (Winter 2020) | Page 25

speculative trading [laughs]? As I say, it was an easy sell from my standpoint, but they weren’t interested. One day, though, out of the blue, I got a call from Vice President Biden, who I’m not close to at all. He said, “What about this rule you’re proposing? How is it going?” I replied, “It’s a good move, but I haven’t got any horses.” He then told me, “Don’t worry, I’m your horse. We’ll get it done.” And so, clearly, he must have talked subsequently to the president about it, although I had no idea he was going to name it the Volcker Rule [laughs]. Bowmaker: You said earlier that you thought President Obama liked to be pic- tured with you to show that he was a “solid financial fellow.” Is there a sense in which he used you? Volcker: Of course, he used me, but I also used him. It was a mutually beneficial transaction [laughs]. GENERAL THOUGHTS ON ECONOMIC POLICYMAKING Bowmaker: When you were president of the Federal Reserve Bank of New York, you had a reputation for paying no atten- tion to the Research Department. Nowa- days, the Federal Reserve has hundreds of researchers, and there are many in the Treasury, the Council of Economic Advis- ers and elsewhere. Are they of any value? Volcker: Yes, there are hundreds of economists poring over their computers, but I think they have just demonstrated their inability to be successful forecast- ers [laughs]. There are some horrendous examples, with the recent financial crisis being the most obvious one. And it was the same when I was chairman of the Fed- eral Reserve. I was often told, “We need another $X million to buy computers.” I would reply, “More computers? Why?” “Oh, we’ve got to do more regressions,” they would say to me [laughs]. I was very cynical. When I arrived in August of 1979, our staff were forecasting in that month that we were on the edge of a recession. Then in September, they were telling us we were in the beginning stage of a reces- sion, and by October, we were apparently in a recession. There was no recession [laughs]! But when you receive those fore- casts from your staff, what do you do? Are you supposed to not tighten up and just let the inflation go on a little while longer? I resent it. The NBER actually dated the recession as beginning in February of the following year when industrial produc- tion had turned down. But it was a phony recession, because the credit controls weren’t put on until March, and that’s when the economy took a nosedive. As I said earlier, though, as soon as the con- trols were taken off, the economy bounced back up. You rarely see any commentary in textbooks about the artificiality of that recession—it is almost completely lost from economic history. PERSONAL REFLECTIONS Bowmaker: When you look back on your career, to what extent does it make you reconsider what you learned as a student? Volcker: When I went to graduate school at Harvard, I took a course by a strict Keynesian named Alvin Hansen, who lec- tured continuously about secular stag- nation. Even then, I thought to myself, “You are telling me we are incapable of generating enough investment, which means we’ve got to rely on government securities for all eternity?” That’s the same conversation that Larry Summers has now, but he didn’t have to listen to Han- sen all the time. And then I remember Larry Klein did an econometric analysis of Keynesian economics in a little book called The Keynesian Revolution. When I read it, everything seemed very logical, but I couldn’t believe those equations could be a reliable description of reality. There are too many uncertainties [laughs]. And so, I had skepticism going way back. Now, I was the last Harvard economics graduate student that didn’t have to take econometrics, so that may have something to do with my current attitude [laughs]. But in the end, I am a believer in Hyman Minsky. He argues that financial cycles are repetitive because there is a certain point when psychology turns from buoyant to depressive; you have a period of good economic activity when people take on more and more risk, but it’s inevitable that you’ll eventually have a bust. Once that happens, people will become conservative again, and a steady period will then follow until you have your next bust. Bowmaker: What value has your public service had to economics as a discipline? Volcker: I prefer the question, “What influence does economics as a discipline have on public service?” During my life- time, the subject has become much more mathematical, much more abstract and much more useless in terms of contribut- ing to effective public policy. For exam- ple, on some relatively simple problems, regression analysis makes sense, but it has been overdone in many cases. When I first went into government in the ’60s, economists thought they knew the answer. Things went pretty well in that decade and confirmed in their minds that they knew all about the business cycle and how to manage it. When that self- indulgence became improper, there were strong competing theories of approaches toward economic policy. Economists could no longer reasonably claim that they knew the answer [laughs]. Demonstrably, things went bad for a while and econo- mists retreated into their shells, becoming junior mathematicians in the process. But, as you well know, the profession has been recently shook up through experience, and hopefully we are moving away from being so insular. Bowmaker: How does your personal- ity affect your style and approach as a policymaker? Volcker: Personality can destroy every- thing. I would say that I’m not as good as others at maintaining relationships with people so that they feel warm and fuzzy. I don’t bubble with bonhomie. Bowmaker: What are your strengths and weaknesses as a policymaker? Volcker: A big problem in government is that there are too many revolving doors. There are people in the private sector who move in and out of Congress or the administration, which creates conflicts of interest. I avoided that, and I would pick that as a strength. Weaknesses? I blew too much cigar smoke in people’s faces [laughs]. And maybe, I wasn’t as trusting as I should have been.  Simon W. Bowmaker is a Clinical Profes- sor of Economics at the NYU Stern School of Business and the author of When the President Calls: Conversations with Economic Policymakers (MIT Press, 2019), from which this article has been adapted. www.MoAF.org  |  Winter 2020  |  FINANCIAL HISTORY  23